State, city workers could be next wave of layoffs as tax revenue dries up amid COVID-19

Charisse Jones / USA TODAY

Thursday

Apr 23, 2020 at 10:07 AM

State and municipal employees could be among the workers who lose their jobs in the next wave of layoffs as tax revenues that pay their salaries plunge during the coronavirus pandemic.

Sales and income taxes, two of the most critical revenue streams for states and some cities, are expected to plummet as shoppers are confined to their homes, tourists postpone travel, and businesses ranging from restaurants to retail shut down and cut jobs.

Now, cash-strapped governments are starting to pare their payrolls, joining the growing list of employers looking for ways to make ends meet.

“There were significant layoffs and furloughs of state and local employees during the Great Recession and that is likely ... in this economic crisis as well,'' says Jared Walczak, director of state tax policy for the Tax Foundation.

He notes some federal aid is available and that projects can probably be delayed to increase available funds for the short term. "But neither of these is likely to fully close that gap.’’

The city of Dayton, Ohio, has already furloughed nearly a quarter of its municipal workforce and is planning to cut more. Los Angeles Mayor Eric Garcetti said the city will furlough its civilian employees for 26 days in the next fiscal year.

And Sens. Bob Menendez, D-N.J., and Bill Cassidy, R-La., have put forward a bill that would create a $500 billion fund to help states and local governments survive the economic downturn while continuing to offer essential services.

“This is going to be a challenging time for every state and every local government,'' says Mark Robyn, a senior officer with The Pew Charitable Trusts. "No one is going to be unscathed from this crisis.''

Income, sales taxes are crucial

Though the nation's economy began to shut down in March as officials ordered businesses to close and told residents to stay home to slow the spread of the coronavirus, state and local governments will begin to really feel the financial fallout this month, tax experts say.

Personal income and sales taxes account for roughly 38% and 31% of the average state's funding, the lion's share of their revenue, according to the Pew Charitable Trusts.

But March sales tax revenue is due to government officials in the next week. And many won't receive the income tax payments typically due in April because deadlines have largely been extended due to the pandemic.

Now, "most states seem to be budgeting as if they would have a 5% to 10% decline in revenues in the next fiscal year,'' Walczak says. "But ...that honestly seems optimistic unless we can see a relatively quick return to the workplace for a lot of people.’’

In some Ohio cities, payroll cuts have already begun.

Cincinnati has furloughed 1,700 workers. And since mid-March, Dayton has furloughed 470 employees, roughly one in four members of its workforce.

Dayton Mayor Nan Whaley says the city initially focused on employees not considered critical during a pandemic, such as those working in recreation centers or in community development.

But now the jobs of police and firefighters are also on the line. Dayton, which gets 70% of its funding from income taxes, is scrapping its 2020 budget and has instructed department heads to prepare to cut jobs to deal with a potential revenue shortfall of 18%.

"It’ll happen probably in June,'' Whaley, who is also the second vice president of the U.S. Conference of Mayors, said of the job cuts. "If we don’t get help from the federal government, we’re talking about cuts to every department," she said, adding "75% of our budget we spend on police, fire and public works, so that’s where all the money is.’’

But the city's staffing has little wiggle room.

“We cut 40% of our employees during the Great Recession,'' she says, "so there's not a lot of fat here.''

Never recovered from Great Recession

Many governments that made steep job cuts during the 2008 recession and in the years right after never saw their payrolls fully recover.

By 2013, states had shed roughly 170,000 jobs, and five years later, states still had roughly 132,000 fewer jobs than they had before the downturn, Robyn said.

But job cuts may be the only way to deal with an economic crisis that some local officials say will be even worse than what the nation dealt with 12 years ago.

"All of us remember the 2008 recession,'' Mayor Garcetti of Los Angeles said in his state of the city speech this week. "Until now, it was the biggest economic blow of our lifetime, and it hurt. But ... this is bigger, and it will hurt more.''

Saying that city revenues have dropped precipitously and the city has borrowed $70 million from its reserve fund and other sources, Garcetti said its civilian workers will be required to take off 26 days without pay - a 10% wage cut - in the next fiscal year. The city will also maintain a hiring freeze currently in place.

"It's my priority to reduce the number of furlough days as soon as possible,'' he said, adding that he is asking federal officials to allow them it tap emergency funds or to direct specific relief to cities.

Counties will also feel the pain

In Wisconsin, property taxes are the biggest chunk of revenue for counties and they are unlikely to be immediately affected by the current downturn. But a dip in sales tax revenue will take a toll on areas like Milwaukee and Dane Counties, which normally see considerable revenue from commuters as well as tourists.

“What we’re already starting to see are hiring freezes,’’ says Rob Henken, president of the Wisconsin Policy Forum. “The longer it takes for the economy to rebound, I think more and more countries will have to look at furloughs and, potentially, layoffs.’’

Certain seasonal positions may also go unfilled, he says, a cost saver that cities and states may also turn to in order to preserve jobs.

Rainy day funds, which many governments shored up after the Great Recession, could also fill budget holes and fend off layoffs.

In 2019, states had a collective $75 billion in those reserves, a record amount, Robyn says. A state with a median-sized fund could pay for its operations for roughly 28 days just with those savings.

It's "good news states ...have that source to draw on,'' Robyn says. "But depending on how long and severe this crisis winds up being, rainy day funds almost certainly will not be able to cover all of the budget shortfalls that states are seeing. Many states have more than they did before ... but some states have very little or nothing really saved.''

Follow Charisse Jones on Twitter @charissejones

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